Will the GFC hit PNG?

As an “airport economist” you get to have some funny experiences.

En route to Papua New Guinea (PNG) recently, I noticed on my Air Niugini flight from Brisbane to Port Moresby that the instructions in the toilets were in Icelandic!

Now Reykjavik is a fair trek from Port Moresby (and not many Vikings have walked the Kokoda Track last time I checked) so I was a bit surprised to see a Nordic language sign on an Air Niugini flight.

But I assumed in this amazing globalised world that PNG’s national flag carrier Air Niugini must have bought or leased aircraft off Icelandic Air. After all, Iceland has been a big casualty of the global financial crisis (GFC), and after its very public financial “meltdown”(sorry I couldn’t resist), Icelanders need all the cash they can get!

As one Norwegian economic journalist commented to me recently in Oslo: “They used to talk about Iceland’s economic miracle! But what’s the Icelandic economy based on? It’s just primary industry and services. All they do in Iceland is catch fish and cut each other’s hair!”

But PNG is a different kettle of fish than Iceland, and is almost as far as you can get from Iceland, in terms of geography, climate and economic development.

PNG is one of Australia’s closest neighbours and most important economic partners in terms of trade and aid.

In fact, PNG and I go back a long way. Sort of. Let me explain.

First, when I was a kid, my father frequently visited the University of Papua New Guinea, as an economic adviser to the Pangu party as PNG moved towards independence in 1975. My brother Rob and I both wore PNG independence t-shirts as kids (that our dad brought back for us) and as it happens, Rob, now a marine biologist at Macquarie University, was also in PNG doing some field work.

While I am the airport economist and he is the airport marine biologist (or zoology’s equivalent of the Bondi vet!) we had never been in one country at the same time in many years until Port Moresby.

Second, as a young(er) adult, I worked at the Australian Council of Trade Unions (ACTU), and found that many ACTU economists had played an important role in PNG’s industrial relations development.

In fact, former ACTU president and prime minister Bob Hawke first made his name as an industrial advocate in PNG when he fought for equal pay and social justice for local Papua New Guinean workers who were discriminated relative to white expatriate workers.

When I visited a few PNG trade unions, they still had pictures of Bob Hawke up in their offices.

Other ACTU advocates followed in Bob Hawke’s footsteps in PNG, included Ralph Willis (later federal treasurer), former ACTU secretary Bill Kelty, the late Les Ayres, Ian Watson and Grant Belchamber and leading public service union figures such as Paul Munro.

Finally, when I joined the Australian Trade Commission (Austrade) from the ACTU, I discovered how important PNG was as a destination for Australian exporters – particularly the small and medium sized enterprises (SMEs).

According to the latest Austrade/ABS research, there are 4233 Australian businesses exporting goods to PNG, which puts it in 7th place overall in terms of exporter destinations, and just behind China but ahead of Malaysia and Japan in the top 10.

In terms of exporting SMEs, Austrade/Sensis research puts PNG again in the top 10, level with Japan.

According to John Brand, Australia’s Senior Trade Commissioner to PNG: “In terms of export traffic, this is a busy spot. We get lots of small businesses through here, many in construction, education, tourism, and of course mining and petroleum.

“And now we have seen a lot of new exporters use PNG as a bit of a test bed to see how they’d go in the Pacific generally, and of course Australia is widely involved in both the physical and social infrastructure right across the highlands as well as around Port Moresby,” Brand says.

“And when things catch on here, they catch on. When the telecommunications company Digicel set up mobile phone services, the people in the highlands as well as Moresby voted with their ears.”

Of course, aid is a big part of the economic relationship between Australia and PNG. While in Port Moresby, I spoke at an Australia Week function with Australia’s Ambassador to PNG, the very distinguished Australian diplomat Chris Moraitis, AusAid’s PNG chief Bill Costello, John Brand and various PNG luminaries.

The very impressive Bill Costello explained that they had moved AusAid’s PNG operations from Canberra to Port Moresby to be closer to the delivery of the programs. Costello explained that as an Australian development professional, there’s almost no more exciting and responsible job than heading the operations in Port Moresby.

“It’s the equivalent of captaining Liverpool or Manchester United in soccer terms. About 12% of PNG’s budget comes from Australian aid, so it’s a big responsibility – but this is where you can really make a difference as an economic development professional,” he said.

But how will PNG cope with the GFC? According to Costello and his economics team, the negative impact of the GFC will be transmitted “through sharply lower commodity prices for oil, most metals and agricultural commodities… which will substantially reduce PNG’s company receipts and the PNG Government’s bottom line (through falling revenues).”

However, Costello also notes some bright spots including high gold prices (PNG is a major gold exporter), prudent fiscal policy in previous budgets, a sound banking system (with ANZ and Westpac playing a strong role), and expected strong growth in construction and transport, storage and communications.

Of the Australian banks in Port Moresby, the ANZ’s Garry Tunstall believes that PNG’s labour market has great potential. “We have many good quality graduates here and we are increasing the proportion of PNG natives in our executive and management ranks. We’d have around five PNG executives now and 30 out of our 56 managers are also local.”

Tunstall believes the liquefied natural gas (LNG) project is the key to PNG’s economic future – “It could double GDP,” he says – but how the resources are managed will be the real test.

Westpac’s Ross Hammond agrees: “There’s no doubt, the world wants gas, and PNG has got it.” Hammond has yet to see the GFC bite. “My loan book has grown three fold in the past three to four years.” And he has enjoyed his time in PNG: “What you learn in PNG, you can take with you anywhere in the world.”

One very experienced PNG hand is Syd Yates, OBE, who heads Kina Securities (and was also PNG’s aide-de-camp at the Beijing Olympics). Yates believes that revenue will be affected by falling commodity prices in areas like copper, but this will be balanced against increases in the price of gold and palm oil. “There is not much of a sub-prime issue here in PNG” he says, “but the biggest issue is how overseas investment will react to the likely appreciation of the PNG currency, the kina, if gold and palm oil prices increase.”

Yates is always watchful of the potential of “Dutch disease” (known in Australia as ‘The Gregory effect’ after famous ANU economist Bob Gregory) where by a rise in a commodity prices dues to a resources boom causes an appreciation of the currency that adversely affects the competitiveness of residual sectors in the economy.

In PNG, that’s agriculture, while in Australia, when Gregory devised his thesis, it was also in manufacturing. Yates says that’s a risk but he also points to some other positive developments such as the establishment of the PNG stock exchange 11 years ago. “We have 16 to 17 listed companies now.”

But he spends the rest of his time on social causes having helped found the PNG’s Business Coalition against HIV-AIDs. “It’s a social problem in PNG but also an economic problem. We are going to need an educated, healthy workforce in the future and the high incidence of HIV-AIDs among the 25 to 45 age group is a problem for the future. That’s why local and expatriate businesses are trying to help the PNG community with this major social issue,” he says.

It is true, Australian business and government representatives are doing their bit in PNG. After the Bali Climate Change conference, PNG was the first international visit of Prime Minister Kevin Rudd when he was elected. Trade Minister Simon Crean and Resources and Tourism Minister Martin Ferguson are regular visitors to PNG, and Environment Minister Peter Garrett was on the same flight as the Airport Economist to Port Moresby from Brisbane (and he was treated like a rock star when he arrived at the airport – but what would you expect!).

But we also remember that it goes both ways. PNG has done a lot for Australia too. It’s an important part of Australian history, that the “Fuzzy Wuzzy angels” of PNG saved Australian lives on the Kokoda Track during World War Two, and their individual contributions were commemorated by Kevin Rudd on Anzac Day this year.

But back to airport economics. As I flew back from PNG, on the Icelandic Air leased Air Niugini jet, I realised that even if you live in two places as poles apart as Reykjavik and Port Moresby, you won’t go untouched by the GFC. However, some of the characteristics that the PNG economy shares with Australia – through trade and aid – will help PNG absorb the some of the worst aspects of the global downturn.

And those ties – from a world war 70 years ago to a world economic crisis today – will always be strong between PNG and Australia.

*Tim Harcourt is Chief Economist with the Australian Trade Commission and the author of The Airport Economist (see www.theairporteconomist.com).